Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Europe's Productivity Dilemma

by TGeraghty Mon Jan 9th, 2006 at 05:40:34 PM EST

To economists, growth in labor productivity - output per labor input - is ultimately the only way to create sustainable increases in living standards.

Thus the fact that Europe appears to have fallen behind the United States in labor productivity growth in the last half-decade or so may be cause for alarm. Or is it?


The chart shows that the European Union as a whole has seen a fall-off in productivity growth since 1995, while in the US productivity growth has accelerated. What explains this pattern?

Investment in Information Technology

According to Brad DeLong, part of the story is investment in information technology:

Nearly all agree that the cause of the [US] productivity growth speed-up of the 1990s lie in the information technology sector. It is the result of the extraordinary wave of technological innovation in computer and communications equipment - solid-state electronics and photonics.

Increased total factor productivity in the information technology capital goods-producing sector coupled with extraordinary real capital deepening [that is, the benefits of rapid information and computer technology investment to the users of ICT capital] as the quantity of real investment in information technology capital bought by a dollar of nominal savings grows have together driven the productivity growth acceleration of the later 1990s.

Interestingly, though, the pattern of productivity growth in the United States has not been uniform across industries:

We now know that all of the difference between Western European and American productivity growth rates in the late 1990s is due to wholesale and retail trade, financial transactions, and other service industries that intensively use information and communications technology [ICT]. Measured American labor productivity growth in these sectors acclerated from 1.6 to 4.8 percent per year between the early and the late 1990s . . . It's not that the rest of the computer-intensive American economy is doing badly: the productivity acceleration in ICT-producing manufacturing has grown even faster, and the acceleration in ICT-using manufacturing is clearly visible as well.

So the accleration of productivity growth in the US has been concentrated in manufacturing sectors that produce information technology or service sectors that use it intensively. So why do we see these big differences in productivity growth across U. S. industries?

Information Technology and Business Reorganization

According to Northwestern University economist Robert Gordon:

[Information technology investments] require complementary inventions and business reorganization to become fully effective. The role of business reorganization and process improvement in the form of "intangible capital" that is complementary to ICT investment has been the focus of recent interpretations of the post-1995 productivity growth revival . . . argu[ing] that measured investments in computer hardware and software require complementary, unmeasured investments in intangible capital, including business reorganization, new business processes, retraining, and general acquisition of human capital.

So just simply buying the new IT equipment is not enough; firms also need to update the way they do business. What kind of reforms are needed? Investments in worker skills and giving workers more voice on the job:

Often IT spending is only the tip of the iceberg - there are a whole host of other investments made in the firm to enhance the use of IT - consultancy expenses for example. Skills are also important: there is a lot of evidence that educated workers tend to be much better at coping with the uncertainties of new IT systems than less skilled workers. Other organizational factors such as decentralisation of decision making and the steepness of the managerial hierarchy have been found to be important. Old-style "Tayloristic" organizations are characterized by large bureaucracies, rigid and centralised hierarchies where decisions made by senior managers are cascaded down to people below. These firms have, on average, produced much lower returns to IT than more "organic" flexible firms with flatter hierarchies, less centralized control and more autonomy for lower level employees.

It seems that some US service-sector firms have taken the lead in making these changes:

We know the American companies that are leading this productivity revolution driven by the application of information technology to distribution: WalMart, Amazon, Land's End . . .

The European Productivity Slowdown

So what does all of this have to do with slow European productivity growth? It seems that Europe has lagged behind the United States in terms of utilizing information technology.

Social savings is an estimate of the impact of a given technology on the economy. The basic idea is: how much are costs reduced by using a technology relative to its' next best alternative? It is clear that the "Anglo" nations - the United States, UK, Australia, New Zealand - have outdistanced Continental Europe in terms of utilizing information technology.

Now go back and take a look at the second chart above. It is clear that whatever productivity advantage the US has does not originate in IT-producing sectors. European productivity growth has accelerated there just as fast as in the US. No, the real secret of US success lies in the IT-using sectors. Apparently American firms have been quicker than their European counterparts at both investing in information technology and in undertaking the business process reorganization needed to realize ITs full potential:

[P]lants belonging to US multinationals appear to be more productive than non-US multinationals. This is true both within the United States and in other countries. . . . In terms of value added per worker US multinationals are 23 per cent more productive than the industry average. Non-US multinationals are 16 per cent more productive than the industry average and domestic plants are about 11 per cent less productive. In terms of output per worker the US advantage over domestic firms is 21.5 per cent and non-US advantage is 17.5 per cent. This is consistent with evidence that the plants of multinational US firms are more productive despite whether the plants are based on US soil or foreign soil.

The US productivity advantage is partially linked to greater use of inputs: US establishments use about 10 per cent more materials and 4 per cent more non-IT capital than non-US multinationals. But . . . IT capital may also be a very important factor: US firms use a whopping 40 per cent more IT capital per worker on average whereas non-US multinationals use only 20 per cent more.

But this difference in the usage of IT is only one part of the story. . . . What mattered was the way that US firms used IT. A doubling of the IT stock was associated with an increase in productivity of 5 per cent for a US firm but only 4 per cent for a non-US firm. US firms appeared to simply get more productivity out of the same amount of IT (this was not true of non-IT capital).

. . . the bigger returns to IT usage for US firms were only found in certain sectors of the economy. These were exactly the same "IT-using" sectors of wholesale and retail that accounted for the US productivity miracle discussed above. In other words it was only in the IT using sectors . . . where US firms' IT productivity was much higher.

. . . Why were the returns so much higher for US firms? We investigated a wide variety of hypotheses, including whether the US firms simply had more skilled workers or better software? Neither of these seem to be the culprit, rather, we suspect that the main reason lies in the managerial structure of US firms. . . . on a range of managerial "best practices" such as incentives (e.g. merit-based promotion and pay), the use of lean manufacturing techniques, performance management and effective targets. . . . US firms were significantly better managed on average than European firms. Looking within Europe at US subsidiaries we also found that they were significantly better managed than non-US subsidiaries and domestic firms. Furthermore, US subsidiaries were also much more likely to allow greater autonomy to employees (a factor associated with higher returns from ICT). This suggests that what gives US firms their advantage is their organisational and managerial structures that enable them to get the most out of their technology.

So why has Europe apparently failed to make the needed investments and reorganization?

Rigid Labor and Product Markets

Yes, here we go again. Many believe that European productivity growth is being clogged up in bureaucracy and excessive regulation. Actually, there seems to be some truth to this. There is a much stronger correlation between employment deregulation and the social savings associated with IT than with, say, unemployment rates:

Every 5-point reduction in the employment protection index is associated with about 1% 0.1% of GDP more in social savings associated with IT.

So it may well be that this is one area where labor regulations really are hurting the European economy:

[B]usinesses invest heavily in high-tech only when they can smell immediate productivity gains from reorganization and restructuring, and European red tape keeps firms from being allowed to reorganize and restructure.

[T]here are regulatory and cultural constraints to adopting US business practices in Europe. For example, removing poorly performing workers is extremely difficult especially for longer tenured workers in larger firms. This is due to strong labour regulation protecting workers against dismissal. These enable managers and workers to block changes that may threaten their vested interests. Rapid promotion of very talented workers is also problematic as young employees are often expected to go through extensive training and unions prefer tenure based promotion systems to those based on individual performance.

In the US, change often occurs due to the entry of new firms and plants but this is difficult to bring about while there are entry regulations protecting incumbents against the threat of new entry. All of these barriers should not be over-emphasised however, as US multinationals appear to be able to do as well in the European outlets as they do back home (Starbucks, McDonalds, etc).

Product market regulation may also have held Europe back in this regard:

As recently as the mid-1990s ICT equipment was much more expensive in EU countries than in the United States. Even in the UK where the differential was least prices were about 30 per cent higher than in the United States, in Germany the gap was 45 per cent whilst in Portugal it was as high as 75 per cent. These price differentials, which presumably reflected barriers to trade, taxes, and weak competition, suggest that European slowness to follow the American lead in regulatory reform may have been unfortunate. The demand for computers has been shown to be quite price-sensitive and the implication of high ICT equipment prices was a delay in accumulating the knowledge and intangible organizational capital necessary for exploiting the potential of (and enhancing the returns to) ICT. EU investment expenditures on ICT rose from 2.2 per cent of GDP in 1990 to 2.9 per cent of GDP in 2000, about what the United States was already spending in 1980.

Or so the theory goes. Still, there are exceptions - labor market regulations have not stopped Sweden or New Zealand from achieving impressive levels of IT investment and cost reduction (or US multinationals located in Europe, for that matter). Low levels of regulation have not helped Ireland or Canada achieve US-levels of IT productivity.

Delay Effects

Back in 1987, Robert Solow famously remarked that "we see computers everywhere but in the productivity statistics." This was in the middle of the great US productivity growth slowdown of 1973 to 1995, when European labor productivity growth rates were roughly double those of the US, and in the middle of a great investment boom in information technology.

This provides a popular explanation for the US productivity slowdown. Professor Gordon:

Numerous observers . . . argue . . . that there is in fact a substantial delay in reorganizing business practices to take advantage of new hardware and software. . . . . . . [T]he role of delayed benefits from the rapid growth in ICT investment in the late 1990s seems incontrovertible. Jeffrey R. Immelt, chief executive officer of General Electric, refers to the delayed benefits of ICT spending by saying, "It takes one, two, three years to get down the learning curve and figure out new ways to use it." Cisco CEO John Chambers estimates the learning curve at more like five to seven years. . . .

Professor DeLong:

[G]rowing sectors--even rapidly growing sectors--don't have an impact on the economy as a whole until they achieve critical mass and can be applied to a large chunk of the entire economy. This lesson is very old. It was first taught by those who noticed that historians of technology date Britain's industrial revolution to 1780-1830 (the age of the key inventions) while social historians date it to 1830-1870 (when steam, iron and the factory achieved critical mass and turned Britain from a nation of shopkeepers into one of factory workers).

By this logic, part of the explanation for Europe's current low productivity growth may be that it is now in a similar position to where the US was in 1987. Europe is now making the investments which will bear fruit some 5 to 7 years down the road (remember European investment in IT as a percentage of GDP increased by some 30% during the 1990s).

So why have European firms not adopted American forms of business organisation more wholeheartedly? There is some evidence that they are beginning to do so. For example, the Wal-mart model is explicitly copied by the UK's largest supermarket, Tesco. It has also been transplanted directly, as Wal-mart has acquired Asda which is now the UK`s second largest supermarket. Organisational changes are large and costly events, however, so change is often slow and difficult.

Display:
Thanks for the detailed diary, but color me skeptical. I'll flag a couple of  issues to start with:

  • hedonic pricing. How much of this supposed increase in productivity in the US is due to the fact that the price of computers and other similar goods is artificially inflated in US statistics to take into account their supposed increase in performance and/or quality?

  • treating IT spending as an investment (in the USA) versus treating it as a cost (in most of Europe)?

  • I've read that most of the productivity gains in the USA could be attributed to Wal-Mart. While it is clear that the company has a top notch computer/logistics system, how much of their competitive advantage (and "productivity gains") comes from dumping costs usually borne by businesses onto the public sector (healthcare, etc...) or squeezing wages? Outside the USA, they are hardly kicking ass, being barely bigger than Tesco and smaller than Carrefour for worldwide sales (outside of the home country).


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jan 9th, 2006 at 06:17:34 PM EST
You put out all the points I wanted to make... ('Old Europe' beat 'New Europe' again ;-) )

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Jan 9th, 2006 at 06:26:32 PM EST
[ Parent ]
I don't really understand the problem that a lot of people seem to have with hedonic pricing. Do you really think $1 worth of computer in 1982 is the same thing as $1 worth of computer today?

Having said that, if Europe doesn't use hedonic pricing then their productivity will be underestimated somewhat.  But the effect may not be that big since Europe in 2000 was only spending about what the US was in 1980 (although the gap would be growing all the time, of course).

On your next point, "all of the difference between Western European and American productivity growth rates in the late 1990s is due to wholesale and retail trade, financial transactions, and other service industries that intensively use information and communications technology [ICT]."

So chalking it all up to Wal-Mart is an exaggeration, but you're right that to the extent that there's a gap, its in a limited number of sectors. The US productivity advantage doesn't apply to investment in general.

Also, as I remarked below, while some of Walmart's productivity gains are due to things that have negative impacts like depressing retail sector wages, or squeezing suppliers, much of it is also due to real advances in using IT to improve inventory management, and economies of scale, which are solid gains for the economy.

What's the breakdown? Your guess is as good as mine.

As for the investment issue, I'm not sure exactly how that breaks out, but nonetheless it would still seem that the trend over the last 5-10 years is that US labor productivity growth has accelerated relative to Europe's, even if the measured levels aren't quite right.

by TGeraghty on Mon Jan 9th, 2006 at 06:43:55 PM EST
[ Parent ]
Re hedonic pricing:

I don't think I do anything more with my computer today than in 1998. Word processing, internet surfing. Google was there already, I had cable, thus high speed already, a color screen. I use Safari now vs Netscape then, but the difference remains small, so I'd say yes, 1$ of computer now is worth 1$ of computer then - computers have pretty much the same price, btw. They have 50 times more memory, but Word files are 50 times bigger for the same content. I checked my PhD dissertation not long ago; written in 1994-95 using Word 5.1 on a Mac, it already had content page, sections, plan mode, etc.... No html, but that's about the only I'd add today.

The other sector you note for "productivity gains" is the financial world. How much of that is due to the Greenspan bubble of cheap money we are sloshing in? It has not been difficult to "create value" in the financial world in recent years, and I seriously doubt it is all real value.

Then a last point - how much of Wal-Mart's productivity has been made possible by cheap energy, something rapidly disappearing...?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 9th, 2006 at 06:52:09 PM EST
[ Parent ]
i do so much more with my computer today, it almost mindblowing.  the same for my wife,,,we laugh often because we seem to not be able to live without our laptops.  Some of these new uses effect my productivity, others more effect the quality of life.  (BTW, I'm not a techie, so I'm probably way behind many others on this site).  Examples:
1.  all our personal finances are on the computer.  very few bills arrive by mail--most email, or to a billpaying service that puts the bill on line for me.  (we move around a lot, so this is a huge benefit for us).  I srite very, very few checks--most bills are automatically paid and charged to my credit card or bank, and then downloaded whenever I want.  I do it Saturday morning, and then run a report showing all charges to look for weird charges).  The computer produces financial reports that are as good as I get in business--versus budget, versus last year, trended--broken down into distinct catgegories--it's a P&L.
Then all my investments are on line.  If I wanted to I can check how my investments are doing everyday--produce a daily net worth statement--I don't of course, but just trying to show the potential.
  1.  shopping, a huge amount of our shopping is done on line--it would be more, but my wife just likes to shop.  the stuff just shows up at the door.
  2.  our house is wireless, so we can use our labtops anywhere.  our CD's are on the computer, and almost all of our new music is downloaded--no big boxes of cd's all over the place--no waiting in line at the music store, or whatever you call them these days.
  3.  the improvement in photography is unbelieve--great pictures, no film, touch up on  line--no storage, its all in the computer.  My wife puts slide shows to music!  Some of her photography is so good, we've framed it and it's a $100 piece of art on thewall that is beautiful--the frame is $95.
  4.  back to investments, I can listen to conference presentations from businesses I'm invested in, or thinking about invest in, in my office.  Talk about transperancy--I can download their SEC reports in a few seconds.  I have all kinds of investgment advice available.  It's in my hands when the guy hits his "send' button.  There is a world of stuff available to us now, and at very high speed--here I don't need to tell any of you this, because I can tell you do much more than I.
  5.  When a family member gets a disease, we can pull out an incredible amount of clinical data on the disease, we can check what clinical trials are being run and where they are, if it's a disease for which there is not yet a cure.
  6. business meetings on line with shared docuuments can be done.  want video, you can do it--I don't,,yet.  I have a lot of signing and sending documents around the country and world--could be on line, and sometimes is--but I'm technicallyh challenged on this one, and not quite there yet.

I'll stop.  No wait, I read daily news from all over the world now.  Not just one opinion from my local paper.  What is the Jerusalem press saying about Sharon, or whatever.  No need to be locked into the MSM--they say something that doesn't sound right--go to the source document which is often online, and I often find they are just wrong--didn't understand it.

This blog,,,I learn a lot here, and enjoy it.  the speeds make it possible, and the wireless makes it fun--blog in the living room, the office, the kitchenl, whatever.  Agnesaparis has gotten me very turned on to the french healthcare system.  so i'm reading a lot on line, listening/reading what you guys are saying about it.  and the better speeds, the better screens, the ease provided by the new software--all make this possible.

Now I'll stop.

by wchurchill on Mon Jan 9th, 2006 at 08:00:33 PM EST
[ Parent ]
Although, just so you know, all of those things except the photography you could have done just as easily with a 1998 computer.  Or a 1996 era computer, really, had Windows been functional back then.  The real difference is high speed internet.
by Zwackus on Tue Jan 10th, 2006 at 12:03:54 AM EST
[ Parent ]
I did not mean to attribute all of these improvements to just the computer itself--but rather to the whole integrated system that has evolved to support this.  High speed internet certainly would be one.  But there was very little on line shopping, for example, back then--all these firms had to upgrade their internal systems and practises, or this never could have happened.I couldn't agree more with the comment from TG's article:
Information technology investments] require complementary inventions and business reorganization to become fully effective. The role of business reorganization and process improvement in the form of "intangible capital" that is complementary to ICT investment has been the focus of recent interpretations of the post-1995 productivity growth revival . . . argu[ing] that measured investments in computer hardware and software require complementary, unmeasured investments in intangible capital, including business reorganization, new business processes, retraining, and general acquisition of human capital.
All of these firms had to develop their own on line systems to tie into the computer and the high speed internet.  

And then the CD's on the computer might be a good example, or the house WiFi.  I imagine you are saying this could have been technically done then,,,,but not by a technological idiot like me.  All of these things have combined in a broader system sense, to allow people with very low technology skills to do this.

So I would argue that the reality is, all of these technologies, systems, intgernet, knowledge, ease of use,, have come together to make us dramatically more productive.  I personally could not have done 80% of this in 1998.

by wchurchill on Tue Jan 10th, 2006 at 12:25:15 AM EST
[ Parent ]
BTW, I don't mean that you, probably a person with far more technical savvy then me, could not have done a lot of this back then.  But I think part of the revolution is bringing this to the masses, so to speak.  For productivity increases to occur, a broad group of people have to be able to make this happen. IMHO
by wchurchill on Tue Jan 10th, 2006 at 12:28:58 AM EST
[ Parent ]
Sure. Now, how much more productive does this make you?
by Colman (colman at eurotrib.com) on Tue Jan 10th, 2006 at 02:28:12 AM EST
[ Parent ]
I think this is a very good question Colman.  On the one hand, I feel incredibly more productive--in a lot of ways.  for example, able to make better investment decisions, due to more knowledge being available.  Another, I spend much, much less time on my personal expenses, and at the same time get reports that show me what they are.  Another, I can live in a smaller home, a more efficient home, because I dont have all these CD's, picture albums, and more importantly for me huge files of business stuff--it's on my computer.  I'm smarter on these health problems when they come up--I've had some serious challenges in the family there.

but i doubt this would show up in the nation's productivity figures--even though I, we, are so much more productive as we see it.

And of course, a lot of this is quality of life.  I've been working tonight in the living room, checking ET at times, when I responded to another Et thread it reminded me of music I would like to hear, so four clicks and it's playing.  I have an absurd number of pictures of my children, and now, hate to admit, grandchildren--absolutely absurd number--but they are there.

so I don't know the answer to your question.  when we got dishwashers did we recognize that as a productivity improvement because it freed up time to read, or spend with the kids.  

Maybe I could ask you the same question--how much more productive do you think this made me, based on what I said.

by wchurchill on Tue Jan 10th, 2006 at 02:51:39 AM EST
[ Parent ]
Maybe it makes you less productive: you're too busy enjoying yourself to do a proper 16 hour work day ...
by Colman (colman at eurotrib.com) on Tue Jan 10th, 2006 at 03:50:56 AM EST
[ Parent ]
ugh,,,dagger to the American heart.,,,,you win.
by wchurchill on Tue Jan 10th, 2006 at 04:25:22 AM EST
[ Parent ]
More seriously, what you're talking about makes you more productive as a consumer.

As a producer? Who knows? The whole thing is terribly complicated even when studied by people in good faith. Add a dash of bad faith and propaganda, I mean marketing and it may become impossible to arrive at a reliable answer.

by Colman (colman at eurotrib.com) on Tue Jan 10th, 2006 at 05:12:10 AM EST
[ Parent ]
Having said that, if Europe doesn't use hedonic pricing then their productivity will be underestimated somewhat.  But the effect may not be that big

The figure I remember is an up-correction of US figures by an order of magnitude. That should be quite important.

I also note that while in the last decade, the US was investing more in computers in real terms, Europe was investing more in cell phones. I'd say the spread of cell phones greatly changed and accelerated business-making, perhabs more so than computers.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Jan 10th, 2006 at 04:47:58 AM EST
[ Parent ]
but nonetheless it would still seem that the trend over the last 5-10 years is that US labor productivity growth has accelerated relative to Europe's, even if the measured levels aren't quite right.

Hedonic pricing has been used big-style in the USA just from 1995. So its effect on apparent differential developments should be significant.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Jan 10th, 2006 at 04:50:44 AM EST
[ Parent ]
Europe in 2000 was only spending about what the US was in 1980

The figures you use are affected by the very same differing statistics.

I tried to dig up some data. In an article from 2002:

...a technique
known as hedonic price measurement, which allows for changes in the quality of goods. Depending on how you do the sums, the fall in computer prices in the past five years ranges from 30 per cent to 75 per cent. Britain is relatively conservative while the US is very aggressive.

This makes a big difference. Real expenditure on computers in 2000 in Britain was about £10bn. The UK's Office for National Statistics estimates that computers that cost £10bn in 2000 would have cost £18bn
in 1995. But if US price indices were used, the figure would be £37bn. The difference amounts to 2 per cent of British GDP. Over the five years, Britain's reported growth rate would have been almost ½ per
cent a year higher if UK statisticians had used US price indices.

For comparison: from 1995 to 2000, US computer investitions rose from $20 to $87 billion - the latter is about six times the British with the exchange rate of the time, while population was five times - the US ahead but only by 15%. But with HPI, the sum added to the 2000 GDP was not $87 but $240 billion. In the last figure I have a source for, Q4/2001, an increase of $1.9 billion was blown up to $23.5 billion.

The article continues:

...Over the period 1996-2000, ICT investment contributed almost 1 per cent a year to reported US growth. Simply substituting net investment at cost for gross investment at revalued prices reduces this by about half.

The effect is that reported US GDP growth overstates the real growth of
US output by about ½ per cent a year over the period. This accounting
difference is equivalent to the main part of the productivity miracle
that still enthuses believers in the new economy.



*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Jan 10th, 2006 at 05:18:01 AM EST
[ Parent ]
I did a lot more digging on the issue, but don't have time for a detailed summary. I will only say that I submit: a lot of economists have tried to calculate corrected ITC spending figures that are comparable, and still got the USA ahead.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Jan 10th, 2006 at 06:46:27 AM EST
[ Parent ]
calculate corrected ITC spending figures

...and connected productivity figures...

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Jan 10th, 2006 at 06:47:11 AM EST
[ Parent ]
These are important caveats, but I think the author's contention that the majority of the US productivity boom is a statistical mirage is just plain wrong.

The reason is what happened to the US economy from 1995-2000 - full employment, real non-inflationary wage growth, declining inequality and poverty for the first time in over 20 years.

Even if some of that was due to stock or housing or dollar bubbles, it still doesn't explain why those bubbles didn't show up as more price inflation and less growth. For that you need a productivity boom.

It may well be that the estimate that US productivity growth has been twice that of Europe is overstated. But the basic story that the US has, for the first time since at least World War II (temporarily, at least) caught up to Europe in terms of productivity growth is still valid and an interesting one, in my opinion.

And there is a progressive story here too -- Walmart notwithstanding, the way to unlock productivity benefits from IT is through economic democracy -- giving workers more of a voice in how firms are run. To me, this suggests that Europe is well-placed to eventually benefit from IT investments, since you guys have a far stronger tradition of doing this than we in the US (with our "maximize shareholder value" ideology and widespread managerial rent-seeking practices) do. That's a point that should not be missed in all this.

by TGeraghty on Tue Jan 10th, 2006 at 02:30:47 PM EST
[ Parent ]
The reason is what happened to the US economy from 1995-2000 - full employment, real non-inflationary wage growth, declining inequality and poverty for the first time in over 20 years.

The problem is that statistical trickesery is involved in the first two numbers, too - while I heard the opposite for the last.

Even if some of that was due to stock or housing or dollar bubbles, it still doesn't explain why those bubbles didn't show up as more price inflation and less growth. For that you need a productivity boom.

I don't think so. I think the explanation lies in the foreign source of the bubble and the strong dollar policy.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Jan 11th, 2006 at 06:54:54 AM EST
[ Parent ]
Regarding te supposedly declining inequality 1995-2000:



*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Jan 11th, 2006 at 07:11:39 AM EST
[ Parent ]
Well, OK, inequality was only growing more slowly 1995-2000.  I guess we should be grateful for small favors.
by TGeraghty on Wed Jan 11th, 2006 at 04:35:09 PM EST
[ Parent ]
I'm really tired now, I promise to look this up tomorrow evening, but IIRC the story was that inaqualities reduced in Clinton's first term and increased in the second. Or maybe the limit was the Republican takeover in Congress. (So my overall judgement of Clinton would be to start with good intentions and policies and results but then succumbed to appeasing the double whammy of Republican blackmail and Wall Street's preference for the easy road of bubbles - not negative but mixed.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Jan 11th, 2006 at 04:50:19 PM EST
[ Parent ]
For example, the Wal-mart model is explicitly copied by the UK's largest supermarket, Tesco. It has also been transplanted directly, as Wal-mart has acquired Asda which is now the UK`s second largest supermarket.

I'd like to think - or hope - that they will not be able to copy or transplant the employment conditions.

by Boudicca (badgerval at hotmail dot com) on Mon Jan 9th, 2006 at 06:18:52 PM EST
Yes, hopefully they will not be able to cut wages, force unpaid overtime, lock employees in stores, etc.

But remember, not all of Walmart's profits are due to Neanderthal labor practices. Too, too much, but not all.

They really have made some key innovations in terms of using IT to manage inventory more efficiently - that's all to the good.

by TGeraghty on Mon Jan 9th, 2006 at 06:32:19 PM EST
[ Parent ]
But remember, not all of Walmart's profits are due to Neanderthal labor practices. Too, too much, but not all.

Also killing competition by all means and selling crap. (Well, Tesco does that, too. For example, don't ever drink Tesco Cola.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Jan 9th, 2006 at 06:34:46 PM EST
[ Parent ]
They have not done too well in Germany, so the "labor rigidities" must be a factor. But is it a factor against smart use of IT or against exploitative approach to labor?

The hard discounters, pretty much a German invention, must also have top notch distribution/logistics and IT, I'd expect. And they kick ass.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 9th, 2006 at 06:43:55 PM EST
[ Parent ]
That's the kicker - you don't think of Walmart as an employer that has spent alot of time "empowering" workers and giving them voice in the running of the firm.
by TGeraghty on Mon Jan 9th, 2006 at 06:47:19 PM EST
[ Parent ]
Well, maybe, but maybe not.  I know a lot of these successful service businesses have improved efficiencies dramatically by pushing the decison making down line--let the store employees make decisions on customer returns for example (Nordstroms does that)--no senior management OK's needed.  the transaction is done fast, the customer is thrilled.  I wonder if that aren't lots of things like this in service businesses where shoving decision making down line,,,and then monitoring computer reports for trends, so you catch something that is going awry.
by wchurchill on Mon Jan 9th, 2006 at 08:22:30 PM EST
[ Parent ]
There is also the nature of the store to take into account.  Unless their business model abroad is dramatically different, Walmarts are big, big stores, with big, big parking lots.  That business model is predicated on the presence of a large customer base willing and able to drive to the store, park, and then drive all their crap home.  This works in the US because most everybody already has a car and is used to doing all their shopping at the end of a long drive.  Also, there is typically a lot of land lying around on the outskirts of town, and the local authorities that approve this kind of stuff are pushovers.  
by Zwackus on Mon Jan 9th, 2006 at 11:42:06 PM EST
[ Parent ]
My understanding is they have a masterfill supply chain management system--all components of that process.  daily (probably faster) data on sales trends, so they can jump on an opportunity,,,or shoot a loser.  This is a critical success factor for their kind of business--coupled obviously with worldwide purchasing,,,,and other practises already mentioned.
by wchurchill on Mon Jan 9th, 2006 at 08:04:59 PM EST
[ Parent ]
I read an article in Fast Company a while ago about this.  The gist of it was that because Walmart is so big, they are able to bully all their suppliers into doing things their way, at their prices.  This has ended up nearly destroying said suppliers - Huffy bicycles and Vlasic pickles were the two examples. They had to completely re-organize their way of doing business so as to deliver exactly what was promised, exactly on time, or Walmart would dump them - which would be fatal since they'd already ramped up prodcution to account for the massive orders Walmart placed.

Sure, their integrated systems are way cool and all, but part of their success has been due to their old-fashioned ability to boss other companies around.  Maybe they can't get away with this as easily outside the US.  I don't know.

by Zwackus on Mon Jan 9th, 2006 at 11:37:08 PM EST
[ Parent ]
I imagine the bullying of suppliers has some real truth to it.  I recall when Sears was at it's Zenith,,maybe the '70's, there were the similar situations.  In fact I remember reading that a key strategy of a number of small and medium sized firms was to neverr give Sears a huge part of their business, because then you were more or less at their mercy.
by wchurchill on Mon Jan 9th, 2006 at 11:42:27 PM EST
[ Parent ]
In this afternoon's Le Monde, they quote an analyst that says that 22% of the total productivity growth of the USA in the late 90s came from Wal-Mart.

But these numbers are fickle. Thanks to a (presumably temporary) boost in car production, 77% of the productivity growth in the 3rd quarter of 2005 came from the car manufacturing sector...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 10th, 2006 at 03:46:39 PM EST
[ Parent ]
.
Having an engineering background, I cannot understand anyone making a comparison of compound growth rate in productivity. One variable too many. Especially when comparing EU-15 from 1973, when there was actually only an EU-9. The difference in currency valuations is quite difficult in comparison through those years of economic development. The economic slowdown of the largest economy Germany after re-uniting with East-Germany, must have a major effect on your charts. Once the monetary Euro zone was created, yearly comparison was much easier and more exact.


Wikipedia -- EU Enlargement

Comparing growth rates, it's like telling a 320lb football player he is doing fine with a 5% weight increase this month where a 180lb player with a whopping 7½% increase gets criticized. A gain of 16lbs vs 13½ lbs respectively.

I would like to see productivity expressed in absolute numbers, e.g. human component in car production, a comparison between Japan, Korea, U.S., Germany and France.

I agree with Jerome on the inflated numbers, a sort of ENRON accountancy in the Bush administration.

"Treason doth never prosper: what's the reason?
For if it prosper, none dare call it treason."

▼ ▼ ▼ MY DIARY

by Oui on Mon Jan 9th, 2006 at 07:42:19 PM EST
I'm glad you said this, because I feel the same way.  I feel real good about understanding productivity numbers at the more micro level--a manufacturing plant, production lines, distribution centers, inventory turnover, (the whole area of quality improvement), and then aggregating those numbers all the way to the top for the business.  But even for that aggregation at the business level, you have to be very careful with the way you use the numbers.

So now mixing businesses, comparing countries--sheesh.  it blows my little mind!  Someday I'll have to do some reading on the details of how they collect and aggregate those numbers.  I'm just not comfortable with things I don't understand, and in fact am actually a little suspicious of.

by wchurchill on Mon Jan 9th, 2006 at 08:18:42 PM EST
[ Parent ]
American workers work longer hours than those in Europe, both per week and number of days per year. If you assume that certain overhead costs are on a per capita basis (like health care) then getting more working time per person makes that person more "productive".

There has also been a shift in the number of women in the labor force, it would be interesting to see a comparison for various countries. In the US women working out of the home is now about 70%. This has to have had an effect as well.

There has been a downward pressure on wage rates in the US over the past 30 years as well. Some have mentioned Walmart, but other factors like immigration and the decline of the power of unions have also had a major impact. Real income for the median family has been flat for decades while costs for things like health care and higher education have risen. The net effect has been that the standard of living for this sector has declined.

The usefulness of "productivity" measures for non-factory workers is also an issue. How do you measure productivity for a lawyer or some one in a service job like a "personal trainer". If you measure dollars per lawyer brought into a firm that is easily distorted by simple changes in billing rates, for example.

Lastly, one has to question whether increasing productivity is a desirable goal. Is excluding people from the work force while increasing the work load of those remaining even a desirable goal?

Perhaps we have reached the point where advanced societies have enough "stuff" and we should be concentrating on the quality and equality of life instead.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Tue Jan 10th, 2006 at 04:58:51 PM EST
I'm going to echo that note of disquiet.

"Productivity" at base, in current parlance, means converting the greatest amount of input material from a low entropy to a high entropy state with the minimum input of paid labour.  But why should paid labour be the only legit "cost" unit?

Given that we're reaching the limits of many material resources (whether as sources or sinks) and that we have an ever-increasing number of potential workers, striving to minimise the worker count while maximising the gobbling of energy and materials seems, to put it mildly, irrational or inverted.

And then of course "productivity" is imho meaningless w/in the confines a metric system based on physically impossible preconceptions like infinite sources and sinks, or "externalities"...  how is it in any sane sense of the word "productive" to bankrupt ecosystems ever more "efficiently" and thoroughly, to distribute persistent toxins ever more rapidly and irretrievably, to destroy remaining forest cover faster and faster, to undermine with increasing violence the climatic stability on which our civilisation depends, to use up irreplaceable fossil energy at an ever-increasing rate?

At some point imho we either have to redefine the word "productivity" radically, or strip it of its "double plus good" semantic overloading...

What happens if we look at Euroland vs US productivity in terms of energy units consumed per widget produced, or recycled vs raw materials consumed per widget produced, or hours of unpaid home/family/community labour consumed to offset the indirect costs of widgets produced?


The difference between theory and practise in practise ...

by DeAnander (de_at_daclarke_dot_org) on Tue Jan 10th, 2006 at 06:14:25 PM EST
[ Parent ]
Here's something (from UN data): the EU-15 plus Switzerland produces 21% of the world's GDP and 13% of global CO2 emissions.

The US produces 21% of world GDP and 23% of global CO2 emissions.

by TGeraghty on Tue Jan 10th, 2006 at 06:28:28 PM EST
[ Parent ]
So, the US -IS- more productive! Good, that settles it.

I´ll go away now.

by Nomad on Wed Jan 11th, 2006 at 07:56:13 PM EST
[ Parent ]
The productivity data are in GDP per hour worked, which should address your first point.

I would argue that raising productivity is important even if your goal is something other than raising material living standards.

For example, if you want to progressively reduce working hours while maintaining at a given level of consumption, then you still have to raise productivity to do that.

Faster productivity growth and provides the resources for doing all sorts of things progressives want, like expanding the welfare state, alleviating poverty, or allocating more resources to public goods like preserving the environment. It's no accident that global right-wing politics has made its comeback during a period of relative economic stagnation.

Talk about "steady state" or reducing material consumption may be fashionable, but nobody has ever explained how politically you are going to get even a subset of people to reduce their living standards. Usually when we have tried that in the past (Great Depression, anyone?) the results haven't been pretty.

by TGeraghty on Tue Jan 10th, 2006 at 06:38:23 PM EST
[ Parent ]
The usefulness of "productivity" measures for non-factory workers is also an issue. How do you measure productivity for a lawyer or some one in a service job like a "personal trainer". If you measure dollars per lawyer brought into a firm that is easily distorted by simple changes in billing rates, for example.

Well, you could map out an admittedly complex way of finding productivity growth among both.  It might not be worth your time, though.  This was partly my point back when I wrote my "Why Wages Are Not Increasing" diary.

Lastly, one has to question whether increasing productivity is a desirable goal. Is excluding people from the work force while increasing the work load of those remaining even a desirable goal?

This is not what productivity growth means.  Productivity growth refers to accomplishing more with less.  ("I have a new piece of machinery that will allow workers to build, at a faster rate and with the same or less energy usage, GMs and Fords that are not pieces of garbage," for example.)  What you're talking about is simply an expansion in production.

Of course it is a desirable goal.  Productivity growth is what makes the difference between the wealthy being the only ones able to buy a product and the rest of us being able to buy it.

Also, you and I may feel like we've got enough "stuff," but we have to remember that many people have almost nothing.  They deserve the chance to build their economies, become more productive, and have "stuff," too.  That sort of discussion is always easiest for the "haves" to take part in.  What we, as people who live within advanced economies, need to concentrate on is building better versions of the same "stuff," such as clean energy sources, necessary machinery (e.g., computers) that operates on less power, and so on.  Unfortunately, Bush's energy policy seems to do just the opposite: Subsidize the older, dirtier means of production at the expense of other activities.

Growth does not imply unsustainable development.  But if you set up the rules of the game so that people and companies are rewarded for unsustainable practices, the two can become the same, as they are in America on many fronts.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jan 10th, 2006 at 07:18:31 PM EST
[ Parent ]
This thread was devoted to the problems of Europe (see title). I expanded it to include the US as a way to compare the economic conditions.

Your remarks muddle the issue by bringing in the issues of the under developed regions. So when I said we have enough "stuff" I was referring to only the industrialized countries, therefore your objections are not relevant to this  discussion.

I tried to address the area of poverty reduction in a recent posting, but it didn't get much attention. Any objective measure will show that the industrialized nations take more from the poorer nations than they put back, claims about free trade notwithstanding. This includes the use of their non-renewable resources, the waste burden added to the environment and the imbalance in pricing structures between them.

So if someone would like to start a separate discussion on the issues of the developing countries I think that would be a good topic, especially if there is any data to be included.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Jan 11th, 2006 at 09:41:36 AM EST
[ Parent ]
I'm aware of the title.  You posed the question of whether productivity growth was desirable.  That's a general question (about industrialized economies, as you've said) that requires a general answer.

The issue of underdeveloped economies is very much relevant to the discussion.  Where is their "stuff" -- or, more to the point, their ability to produce said "stuff" -- going to come from?

And you didn't answer my point about productivity.  Many people, even in the industrialized world, do not have a lot, and I think it's ridiculous to even entertain the idea of productivity growth not being desirable.  It's the makeup of what we produce that needs to be discussed.  Not the quantity.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 11th, 2006 at 02:23:18 PM EST
[ Parent ]
Angry Bear has some posts about how US multinationals exploit lower EU corporate tax rates by transferring profits earned in the US to subsidiaries in the EU by manipulating transfer pricing.

I wonder if this plays any role in the apparently superior productivity performance of US multinationals located in the EU. Any ideas?

by TGeraghty on Wed Jan 11th, 2006 at 12:22:08 AM EST
Transfer Pricing by U.S.-Based Multinational Firms

Existing studies on multinational firms and plants find that they are larger, more innovative, exhibit higher productivity, pay higher wages and employ greater numbers of skilled or educated workers than domestic firms. However, few if any of these studies contemplate the substantial differences in imported input prices that we document in this paper. The ability to purchase lower-priced imports of materials and equipment from overseas parents has the potential to explain a wide range of the positive performance attributes of multinational affiliates, in particular their greater size, better productivity and higher wages.
by TGeraghty on Wed Jan 11th, 2006 at 12:28:04 AM EST
[ Parent ]
My internal experience of transfer pricing is that this is right on the money.

However, one of the pieces you quoted earlier compared US vs non-US multinationals? Was there any more detail in that? It would seem to be the way to remove transfer pricing from the equation somewhat.

The other issue of course is simply company and market size. I've seen estimates of WalMart's efficiency in the US vs in smaller markets around the world and these suggest that working in the single language US market vs. a many language EU market requires different benchmarks to begin with.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 11th, 2006 at 03:45:44 AM EST
[ Parent ]
Another thing that I never see discussed anymore is the impact of the wealth transfer from Europeans (and especially Germans) who bought into the NASDAQ near or at the top of the bubble and suffered some of the worst losses (I've seen once that Germans had lost EUR 150 bn on the US markets in 2000-02 - i.e. enough to have a noticeable macroeconomic impact and to skew GDP, growth and productivity numbers)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jan 11th, 2006 at 06:19:33 AM EST
[ Parent ]


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries